On 12 July, the UK government published its long-awaited White Paper on "The future relationship between the United Kingdom and the European Union". One major focus was the UK's future trade arrangements, both with the EU and worldwide. Below, we set out some thoughts on these proposals, their effect on the UK trade and likely responses from the EU.
The suggested structure of the agreement provides welcome clarity on the overarching institution framework upon which the UK intends to base its future relationship with the EU. The White Paper's position takes into account the EU27 position on structure as related, for example, by European Chief Negotiator Michel Barnier in New York last Tuesday. It suggests a UK-EU association agreement providing the overall institutional framework, with a free trade agreement sitting underneath - a similar set-up to the EU-Ukraine model.
Facilitated Customs Arrangement ("FCA")
The White Paper essentially confirms the Chequers proposals released on 6 July, while providing more details on the new FCA system. Traders will welcome the confirmation that the UK is committed to retain EU standards for all (relevant) goods trade including agri-food. Its proposed mechanism for this purpose is a ‘common rulebook’ that will include the Union Customs Code, along with rules related to safety and security. This is a big step towards potentially adopting a model for trade of goods that does not require sophisticated EU/UK border controls. Traders will also welcome the confirmation that the new Customs Declaration Service - due for implementation by early 2019 – would be compatible with this system.
On the other hand, FCA implementation as anticipated by the White Paper could be both lengthy and challenging, with the requirement to evidence end-destination at point of entry placing significant burden on traders. For example, it would be challenging to evidence the end-destination of intermediate goods which are imported by the UK, used in the production of goods and then exported to the EU. Moreover, the White Paper states that "where a good reaches the UK border and the destination cannot be robustly demonstrated at the point of import, it will pay the higher of the UK or EU tariff. Where the goods destination is later identified to be a lower tariff jurisdiction, it would be eligible for a repayment from the UK Government equal to the difference between the two tariffs." This could lead to a customs fraud situation where traders try to take advantage of a lower tariff where possible. This will concern the European Commission, especially as it would no longer be able to bring infringement proceedings against the UK for breach of EU law. It is possible that, as an intermediate measure, the UK Government will apply EU tariffs on all imports until such time that the FCA can be practically operational. However, it is unclear how long this process would take.
More details will also be needed on the formulae used to remit the relevant tariff revenue collected by the UK on behalf of the EU and its Member States. This is especially important at a time where the European Commission is looking to eliminate weaknesses and close loopholes in the implementation of the Customs Union to protect the EU's financial interests.
Trade in services
With respect to services, the UK Government states that UK’s arrangements with the EU should not be constrained by existing EU free trade agreement precedents. However, if the EU wanted to further develop mutual recognition principles with the UK, it would probably – at least on paper – want to afford other World Trade Organisation (WTO) members the opportunity to demonstrate that they meet the same requirements as the UK, and should therefore benefit from similar recognition. The compatibility of this ambition with the WTO's General Agreement on Trade in Services will have to be assessed thoroughly by both the UK and the EU.
Mutual Recognition Agreements with non-EU partners
The UK Government recognises that the common rulebook on goods will limit its ability to negotiate trade deals in covered areas with non-EU partners. It envisages, however, that this will not apply to "other areas of regulation" where the UK will be in a position to negotiate mutual recognition agreements with third countries, including through mutual recognition of testing assessments and the possible introduction of a UK mark. The White Paper does not clarify how wide the scope of these non-covered areas will be, their compatibility with World Trade Organisation most-favoured nation obligations, or their future relationship with the EU.
UK trade policy with the rest of the world
The White Paper also heralds the pursuit of an ambitious bilateral trade agenda, including with the US, New Zealand and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The mention of a US trade deal is welcome, as in this market lies considerable opportunities for UK businesses. There is also scope to develop a more comprehensive approach to services via new trade agreements. Nevertheless, with a curtailment on goods, the negotiations with the United States Trade Representative will be difficult; services are sectors where non-tariff barriers are high and competence is often shared by both US federal and US state governments.
The White paper gives scope to shape an autonomous policy on sanctions, but the extent of divergence from the EU27 will be a political choice. The Government expects strong cooperation going forward, including via the conclusion of an agreement to exchange information on listings, and the establishment of a UK-EU dialogue on future designations and regimes. Potential divergence in future, however, could lead to additional compliance burdens for businesses and financial institutions, which may have to deal with multiple sanctions regimes.
If a number of questions remain outstanding and will need further clarification, traders will welcome the beginning of a long-awaited UK trade negotiating position, especially with respect to trading goods with the EU27. Businesses should continue to plan for full implementation of the UCC, and take full advantage of the available trusted trader schemes for trades with the EU27. In parallel, the impact of the withdrawal of the UK from the EU internal market on services should be carefully reviewed and planned for, for all traders of services, not just financial ones.